Euro zone inflation rate drops to five year low

With EU leaders meeting in Brussels today, much focus will be on eurozone inflation dropping to a five-year low alongside continued levels of high unemployment this month.

Consumer prices in the 18 countries using the euro rose by just 0.3 per cent year on year in August, the smallest increase since October 2009, European Union statistics office Eurostat showed.

The bleak picture emerged alongside further economic woes for Japan with its own weak data yesterday, while in the United States consumer spending shrank even with strong economic growth.

EU inflation, which dropped unexpectedly to 0.4 per cent in July, has been locked in what European Central Bank president Mario Draghi called a "danger zone" of below 1 per cent since October last year.

Vanishing inflation poses problems for the ECB as it tries to respond to the euro zone's stalled recovery, which is facing additional struggles because of economic sanctions imposed against Russia in July over its involvement in the deepening conflict in Ukraine.

Any immediate action coming at the ECB’s September 4th policy meeting is not considered likely, however.

The drop in August inflation was led by a 2 per cent decline in the highly volatile prices of energy; and by prices of food, alcohol and tobacco falling by 0.3 per cent for a second month in a row.

In June the ECB cut interest rates to record lows, started charging banks to keep their funds overnight and launched a new long-term loan programme that will start in September and aims to give banks an incentive to lend more to the real economy.

Since then, the ECB has been hoping to see the impact of its new liquidity injection before considering further stimulus measures, though Mr Draghi has stressed repeatedly the ECB stands ready to do more if needed.

The ECB targets an inflation rate at below but close to 2 per cent, a level not seen since the first quarter of 2013.

Separate data from Eurostat showed unemployment in the euro zone unchanged as anticipated at 11.5 per cent for a second month in a row in July, leaving 18.4 million people without jobs in the €9.6 trillion economy.

Japanese data yesterday showed household spending fell much more than expected and factory output remained weak in July after plunging in June, suggesting weak export levels and a rise in sales tax in April may weigh on the economy longer than expected.

Household spending fell 5.9 per cent in July from a year earlier, nearly double the forecast drop, as the higher levy and bad weather kept consumers at home. Exports were weak, while industrial output rose 0.2 per cent in July, a tepid increase from a 3.4 per cent fall in June, the fastest drop since March 2011.

In the US, consumer spending unexpectedly fell last month as savings rose to their highest level in more than 1½ years. Consumer spending dipped 0.1 per cent last month, the first decline since January, after an unrevised 0.4 per cent gain in June.